Islamic Banking Sector Blossoms into Multimillion Dollar Enterprise

By McDonald, Joe | THE JOURNAL RECORD, December 31, 1996 | Go to article overview

Islamic Banking Sector Blossoms into Multimillion Dollar Enterprise


McDonald, Joe, THE JOURNAL RECORD


KUALA LUMPUR, Malaysia -- Fawzi Ahmed was more concerned with morality than profit when he opened an account in 1983 at the fledgling Bank Islam, a bank run by Islamic principles.

Most important was Islam's ban on interest payments as usury. Fawzi and other Muslim depositors would not be paid interest on the money in their accounts -- rather, they would share in the bank's profits on its investments in businesses.

But ask Fawzi, a municipal surveyor, why he uses Bank Islam today, and he doesn't even mention religion. "Convenience. It's near my office in City Hall," Fawzi said one sunny morning outside one of the bank's branch offices in Kuala Lumpur, Malaysia's bustling capital. "They have checking, everything I need." Founded in Egypt three decades ago simply to give pious Muslims a safe place to keep their money, banking by Islamic principles has grown into a competitive, multibillion-dollar industry that is expanding rapidly in many parts of the world. Islamic banks are common in the Middle East and have sprung up as far away as London and the Philippines. The theocratic leaders of Iran and Sudan require their bankers to do all of their business by Islamic guidelines. Since Bank Islam became Malaysia's first to operate on Islamic principles, the industry has taken off as a consumer business in this Southeast Asian nation. Malaysia's government is encouraging its Islamic bankers to try to become global leaders by offering such innovations as home mortgages and a growing array of sophisticated financial services. The bedrock of Islamic banking is the ban on interest payments. These are regarded by the Koran, Islam's holy book, as exploitation because depositors and lenders make money without providing labor or sharing risks. Islamic banks pool deposits to invest in construction, commodities trading and other businesses that do not profit from interest payments. Commercial borrowers pay the bank and its depositors a share of their profits instead of interest. That involves risk, because the bank does not know in advance what the profit, if any, will be. Led by giants like Saudi Arabia's al-Rajhi Banking and Investment Corp., which has $8 billion in assets, the world's Islamic bankers are believed to preside over total deposits of up to $70 billion. That is still less than the resources of a single big Western or Japanese bank. But rapid growth in the industry has prompted Citibank and other major international banks to open Islamic subsidiaries. In Malaysia, Bank Islam's deposits have grown to some 3 billion ringgit, about $1.2 billion, while other banks have followed in its footsteps by opening separate teller windows to handle Islamic transactions. …

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Islamic Banking Sector Blossoms into Multimillion Dollar Enterprise
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